Don’t get caught underpaying staff on annualised pay rates
On 5 September 2025, the Federal Court handed down a major ruling.
This case involved the alleged underpayment of employees by Woolworths Group Limited (Woolworths) and Coles Supermarkets Australia Pty Ltd (Coles), as claimed by the Fair Work Ombudsman (FWO).
The decision has important lessons for all employers using annualised wages or set-off clauses.
The key message: Pay averaging arrangements beyond a pay cycle, or award term, may no longer be acceptable by the Courts for some employees. In these cases, employers may need to pay all entitlements for each pay period, and records must be accurate.
Why this matters
Coles and Woolworths had clauses in staff contracts allowing them to pool overpayments across six months, with the idea this could cover all obligations for minimum wages, penalties, overtime, allowances, and loadings. The Court ruled that this approach, which has historically been relied upon by many employers, is no longer valid. This means that if entitlements exceed award minimums, they must now be paid in the same pay period they arise. Averaging or pooling payments across multiple pay cycles or annually may no longer meet legal requirements.
The ruling also confirmed that proper record keeping is critical. Employers cannot rely solely on roster or clocking systems. Hours worked, overtime, penalty rates, and allowances must be clearly documented for each pay period and reconciled with payments made to staff.
How this affects you in practice
Here’s what it looks like on the ground for staff covered under many industrial awards.
Example - Overtime worked in a busy week
If an employee who is rostered and paid weekly, works overtime that week, the additional overtime hours must be paid in that same week, if required under the Award. In some situations, the additional hours cannot be ‘set-off’ or “balanced out” with a lighter working week the following week or a later time.
On the other hand, if an employee is rostered and paid fortnightly and their contract clearly permits a set-off arrangement if overtime is worked, then in this scenario, additional hours worked in the first week could potentially be ‘balanced out’ with lighter hours in the second week.
What employers should do now
Although the decision is expected to be the subject of an appeal, to address the impacts of this decision, employers should:
Make sure you fully understand the rostering and overtime requirements when an Award covers your employees role.
Reconcile your payroll each pay or reconciliation period to ensure all entitlements are accurately calculated.
Review rostering practices for potential compliance gaps.
Review pay rates for award-covered employees paid an annualised salary or paid under a set-off clause in their contract. Audit salaries, overtime, and allowances to confirm employees are being compensated correctly.
Review contracts and individual flexibility agreements to ensure they comply with the decision and modern award requirements.
Consider long-term payroll strategies, such as
Whether salaries or hourly rates are more appropriate.
Whether longer rostering periods (i.e. fortnightly, monthly) should be adopted - this should be clearly stated in the employment contract.
The adoption of an enterprise agreement which could allow your workplace more flexiblility.